Cablegate: Ambassador's Introductory Call at Ministry Of

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R 180638Z OCT 06 ZDK
FM AMEMBASSY PRAGUE
TO RUEHC/SECSTATE WASHDC 8102
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
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RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS PRAGUE 001296

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/NCE ERIC FICHTE,
COMMERCE FOR ITA/MAC/EUR MIKE ROGERS
TREASURY FOR OASIA ANNE ALIKONIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV ELAB EZ
SUBJECT: AMBASSADOR'S INTRODUCTORY CALL AT MINISTRY OF
LABOR AND SOCIAL AFFAIRS

REF: PRAGUE 01173

1. (SBU) Summary: During the Ambassador,s October 16
introductory call on Deputy Prime Minister and Minister of
Labor and Social Affairs Petr Necas, Necas expressed his
support for strong transatlantic ties as a fundamental
foreign policy pillar for the current government, and
lamented the Czechs' exclusion from the Visa Waiver Program.
Necas agreed to a follow-up meeting to discuss the impact of
a new law making it mandatory for all non-EU citizens to pay
into the Czech social security system. Necas reviewed the
challenges his government faces implementing fiscal policy
and pension system reforms, regretted continued decrease in
the defense budget and admitted that reform prospects were
dim until early elections, likely to take place in summer
2007. End Summary.

2. (SBU) Minister of Labor and Social Affairs Petr Necas (who
is also deputy chairman of the governing ODS, and previously
served as ODS shadow Defense Minister) emphasized that
maintaining strong transatlantic ties with the U.S. was a key
priority for his government. He reiterated his government,s
continued support to NATO and coalition military missions
abroad, including in Iraq. Necas pointed out the only problem
in the strong bilateral relationship involved the visa
requirement for Czechs, and said he was perplexed that the
U.S. would limit the free movement of people, one of the
greatest privileges of a democratic system. He explained that
the visa issue is a tool for anti-Americanism among Czechs
and should be abolished or "softened" in the next couple of
years.

3. (SBU) The Ambassador raised concerns about the new law
that requires all citizens of non-EU countries and countries
without a bilateral totalization agreement to pay into the
Czech social security system starting January 2007.
Acknowledging the problem, Necas agreed to meet separately on
the issue.

4. (SBU) Necas briefed the Ambassador on the state of the
draft 2007 budget, lamented that the defense budget continued
to shrink further below the 2% GDP NATO target, and laid out
his priorities for pension reform. He reported that the Czech
budget deficit has accelerated over the last several years
and caused the Czechs to miss the Maastricht convergence
criteria for government deficits of 3.0% of GDP. He said the
government deficit reached 3.6% of GDP in 2005, is expected
to be in the range of 3.6% to 3.8% for 2006, and may go as
high as 4.2% of GDP in 2007 (reftel A).

5. (SBU) Necas blamed the previous government for the budget
deficits, and has proposed reforming the pension system to
control government spending. He reported that the pension
system will cost the government CZK 5 billion (USD 230
million) in 2006, and CZK 10 to 15 billion (USD 500 to 750
million) by 2010. To ensure the solvency of the pension
system and start reducing expenditures, he wants to increase
the number of years workers pay into the social security
system as well as the mandatory retirement age to claim
benefits. He is also calling for a reduction in welfare
benefits for the unemployed to encourage recipients to take
one of the estimated 250,000 available jobs and start
contributing to the economic system.

6. (SBU) Despite his bold plans for reform, Necas appeared
pessimistic about implementing any changes before possible
early elections in 2007. Given his government's failed vote
of confidence on October 3, Necas predicted a caretaker
government of technocrats would rule until early elections in
either May or August 2007. He ruled out any chances of a
grand-coalition between the two leading parties, CSSD and
ODS, and said it was "unacceptable" to the vast majority of
ODS members. He made clear that without a strong political
consensus on the need for economic reform, it was unlikely to
happen.
GRABER

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